Investors in actively managed funds have long complained
that not only are fees too high, but some fund managers operate
in a heads you win, tails I lose environment.
In other words, managers get to charge high fees during good years but are not
penalized if they subsequently underperform and lose investor
capital. With no form of clawback, some fund managers, and in
particular hedge fund firms, have an incentive to swing for the
fences, rack up a few good years, and then sit back and become
underperforming asset gathers.
Not so Orbis Investment Management. The $28 billion,
Bermuda-based global equity manger has a different approach: it
actually gives money back to institutional investors in years
when it does not beat its benchmark. All fees are
performance based, but we return the fees in periods where we
underperform, explains Adam Karr, Orbis U.S. managing
director, who is based in San Francisco.
Investors in Orbiss funds who opt to invest in the
refundable fee structure have two options to choose from:
either a flat performance fee of 33 percent above a benchmark,
or another option in which investors pay a base fee of 45 basis
points or less, depending on the amount of assets, and a
performance fee of 25 percent above a benchmark. Investors are
eligible for a refund when the funds underperform their
The fees that the manager earns are placed into a trust
account created for the client. Orbis only takes a fee once the
trust account has reached 3 percent of client assets. If the
manager underperforms, the fees go back to the investor.
The result, Karr says, is a far greater alignment of
interest, especially for those clients that choose the option
of no management fee and 33 percent above a benchmark. (Most
investors choose to pay a management fee.) For us it is
not an asset-gathering game, says Karr. We do not
make money off the base fee. In order for Orbis to cover
its costs, it needs to outperform. The reason we can
exist is that we have to generate alpha, says Karr.
A value focused, bottom-up stock picker, Orbis offers a
number of global equity strategies to investors. Since its 1990
inception through June 30, the firms flagship global
equity strategy has generated an annualized return of 12.1
percent net of fees, verses 6.4 percent for the benchmark.
Orbis began offering its refundable fee structure in 2004.
This feast or famine fee structure, however, can lead to lean
years. But due to its unique structure, the firm has been able
Orbis was founded in 1989 by Allan Gray. South African-born
Gray earned an MBA from Harvard University after which, in
1965, he worked for Fidelity Management. In 1974 he returned to
South Africa and started his own investment firm, Allan Gray
Property Ltd., which now manages $30 billion in assets and is
the largest privately-owned money manager in the country. Orbis
was founded as a way for Allan Gray clients to invest outside
of South Africa.
Gray, 79, who lives in Bermuda, has put his ownership of
Orbis into a trust structure, insuring that the firm can exist
in perpetuity. The trust also helps insure the firm has
financial resources to draw on in hard times, when it cannot
rely on performance fee income.